Academic journal article Journal of Accountancy

Confirming Permitted Statutory Accounting Practices of Insurance Enterprises

Academic journal article Journal of Accountancy

Confirming Permitted Statutory Accounting Practices of Insurance Enterprises

Article excerpt

Insurance companies prepare their statutory financial statements using accounting practices "prescribed or permitted by the insurance department of the state of domicile" (see the sidebar, page 108). Though that basis of accounting is expected to be replaced with statutory accounting practices codified by the National Association of Insurance Commissioners, the change will not occur until 1996 at the earliest.


Insurance companies currently prepare their statutory financial statements in accordance with accounting principles and practices prescribed or permitted by the insurance department of their states of domicile. The National Association of Insurance Commissioners (NAIC) currently has a project under way to codify statutory accounting practices through a complete revision of its Accounting Practices and Procedures Manuals, which, when complete, are expected to replace prescribed and permitted accounting practices as the statutory basis of accounting for insurance enterprises. Accordingly, though permitted accounting practices could exist both before and after codification, codification is likely to result in changes to what is considered a prescribed versus permitted statutory accounting practice. Furthermore, postcodification permitted statutory accounting practices will be exceptions to the statutory basis of accounting.

Current prescribed statutory accounting practices include state laws, regulations and general administrative rules applicable to all insurance enterprises domiciled in a particular state, NAIC Annual Statement Instructions, the NAIC Accounting Practices and Procedures Manuals, the Securities Valuation Manual (published by the NAIC Securities Valuation Office), NAIC official proceedings and the NAIC Examiners' Handbook.

Permitted statutory accounting practices include practices not prescribed above but implicitly or explicitly allowed by the domiciliary state insurance department. Insurance enterprises may request permission from the domiciliary state insurance department to use a specific accounting practice in the preparation of their statutory financial statements (1) when the enterprise wishes to depart from the prescribed statutory accounting practices or (2) when prescribed statutory accounting practices do not address the accounting for the transaction(s). Furthermore, permitted statutory accounting practices may have been allowed through the regulatory examination process.

In the meantime, American Institute of CPAs Statement of Position no. 94-1, Inquiries of State Insurance Regulators (which is effective for audits of insurance companies' 1994 statutory financial statements), requires auditors to obtain competent evidential matter from domiciliary state insurance regulators that statutory accounting practices that management asserts are permitted indeed have been permitted by the insurance department. Written confirmation is only one of three types of corroborating evidence identified in the SOP, and it is a matter of auditor judgment as to whether confirmation is necessary. Nevertheless, positive confirmations provide the best audit evidence and, accordingly, should be used whenever practicable.

This requirement appears straightforward; however, permitted accounting practices generally have not been confirmed in the past, so the SOP stakes out new territory for insurance companies, auditors and state insurance regulators. As a result, the anxiety level about the process is high. No one is sure just how many "permitted accounting practices" there are or how responsive regulators will be to requests for confirmation or clarification.

Nevertheless, with planning, cooperation and understanding the process can run smoothly. This column should help auditors and their insurance company clients meet the challenge the confirmation process will present.


Affected parties should start planning now. …

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